Using the two-period real intertemporal model we studied in chapter 11, answer the following questions:

(a) Analyze the effects of a decrease in productivity on equilibrium prices (wages and interest rates) and quantities (output, consumption, employment and investment).

(b) Now, suppose that the decrease in productivity also effects the tax collection efficiency of the government. Therefore, for the same amount of spending, the government needs to collect a higher amount of taxes. Given this additional effect, revisit your results in part (a), analyze the additional changes in equilibrium prices and quantities.